Detour Gold
admin | Jul 22, 2010 | Comments 0
Detour Gold Corporation was founded just four years ago, and today it is about to construct one of the largest Gold mines in Canada. The company just completed a feasibility study on their Detour Lake project. You can see from the map below that the project is located in Ontario, just north of Lake Shore Gold's Timmins Mine and Kirkland Lake Gold.
Detour Lake – Canada
The Detour Lake deposit is Canada's largest undeveloped pure gold reserve and ranks sixth among the top ten largest gold reserves in North America, with 11.4 million ounces. Detour Lake was actually a past producing mine, as it began operations in 1983 but was shut down by Placer Dome in 1999 when the Gold price dropped to $250. At that point the mine became uneconomical. From 1983-1999 it produced 1.8 million oz of gold.
Detour Gold purchased the project in 2007 from Pelangio Mines for $75 million, and since that time the project has expanded enormously. Right away Detour began an extensive drilling campaign at the site. Detour Lake did already have gold in the ground since it was a past producing mine. You can see from the chart below that overall resources have increased by a substantial amount in the past four years. 21 million oz total, with 11.4 million in reserves.
The positive results of the feasibility study released in May of 2010 confirmed that the future Detour Lake open pit operation can be a significant gold producer with the added benefits of a long mine life within a stable political environment. The Company plans to start mine development by late 2010 and commence gold production in early 2013.
Positive feasibility study announced in May 2010:
* Proven and probable open pit reserves of 11.4 million ounces contained gold with a waste to ore ratio of 3.3 to 1
* Global measured and indicated mineral resources of 17.7 million ounces (inclusive of mineral reserves) and 3.4 million ounces in the inferred category
* 16 years life of mine (LOM) at mill throughput of 55,000-61,000 tonnes per day (tpd)
* Average annual gold production of approximately 650,000 ounces
* Average LOM cash operating costs of US$437/oz; US$454/oz with royalty
The estimated start up capital costs is $992 million, which actually for a project this size isn't too bad of a price. In fact, at today's Gold prices Detour could recoup that initial investment in just a few short years.
A more detailed look at the open pit plan. The orange shaded Former Pit is dwarfed by the new pit design. The high grade ore in Phase 1 will be mined first, and you can see there is a ton of it(no pun intended) right below the Former Pit. That is what Detour is going after first. Notice all the red shaded high grade ore in the graph below sitting under the Former Pit.
Production and Financials
Since Detour Gold has no mines currently in production their past financials are irrelevant. The cost to construct Detour Lake is roughly $1 billion. The company currently has $550 million in cash and no debt, having just raised $250 million through an equity offering. They have talked about funding Detour Lake with 50% equity financing and 50% debt financing. I would imagine that shareholders won't be faced with much more dilution since they have essentially raised enough already to fund more than half the construction. I would look for debt offerings in the future.
As you can see from the graph below, Gold production from Detour Lake will be substantial. In the second and third year of production they will be over 700,000 oz at a cash cost of under $400. Cash cost will be so low in the first few years because they will be mining higher grade ore. The economics still look good after that, although production will level out around 600,000 oz per year.
87 million shares outstanding
Conclusion
Hindsight is always 20/20. It still amazes me when companies like Detour Gold were able to purchase projects for pennies on the dollar. $75 million is all it cost them to buy Detour Lake. And 4 years later it's about to start construction and will be one of the largest Gold mines in Canada.
Right now the company has a market cap of $2 billion. Considering the size of Detour Lake and the fact that construction cost will be recouped in a few years(at $1,200 Gold), the shares are a bargain. If the mine was currently producing(650,000 oz per year at roughly $450 per oz cash cost) the company would have a market cap well in excess of $4 billion. But the mine isn't in production, it is still 2 1/2 years away from start up, so there are still risk.
The company also doesn't have any other assets to fall back on, as Detour Lake is the only major project they own. If they run into any issues or Gold prices fall hard, the shares are going to take a major hit, more so than any established producer will. But that is the risk you take. If Gold stays at current levels, and the project continues on time and on budget without any major problems, then the shares will continue to outperform as they aren't yet fully pricing in the project.
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almamor
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